Eurozone avoids recession as Germany powers ahead

FRANKFURT – Germany prevented the economy of the 17 countries that use the euro from falling into a recession in the first quarter of the year despite a raging debt crisis that's raising the specter of the breakup of the currency union.

The country, which accounts for over a quarter of economic output in the single currency bloc, managed to post growth of 0.5 percent in the first three months of the year against the previous quarter — equal to the U.S. rate according to Eurostat, the EU's statistics office.

This growth was because Germany's exporters were able to offset tough conditions across Europe by gaining business elsewhere, including China and the U.S. Solid domestic consumption levels also helped shore up the country's economy, the world's fourth largest.

Germany propped up the ailing eurozone economy during the quarter, preventing it from falling back into recession — officially defined as two consecutive quarters of negative growth. Without it, the economy of the remainder of the eurozone would have slipped into a recession with a 0.25 percent decline in GDP, according to Commerzbank analyst Cristoph Weil.

"The euro area might have dodged recession, but it is firing on only one cylinder," said James Ashley, senior European economist at RBC Capital Markets.

The recent round of quarterly corporate earnings highlighted how the country's exporters were able to offset tough conditions across Europe by the rebound in global trade. Luxury carmarkers, such as Mercedes-Benz, Audi, and BMW, for example, all showed strong profits on increased sales in Asia, especially China, and in the U.S., where the economy is making a modest recovery.

Ironically, without economies such as Greece in the eurozone, Germany would be facing a higher-value currency to the likely detriment of its businesses. Many economists say their country's goods are more competitive on price due to the weakened euro than at any time in the past 30 years. The worry for German exporters is that the euro may surge if Greece exits, which would make it more difficult for them in international markets.

"Continued growth in foreign sales supports the view that the country is locked into a favorable exchange rate," said Tim Ohlenburg, senior economist at the Centre for Economic and Business Research. "With many neighbors stagnating, the low unemployment and positive development of trade would otherwise be hard to explain."

While Germany manages to eke out respectable levels of growth, others in the eurozone are suffering. Of the euro's 17 members, seven are in recession: Ireland, Greece, Spain, Italy, Cyprus, the Netherlands, Portugal and Slovenia.

Though Eurostat revealed that the eurozone posted flat output in the first quarter — against expectations that it might actually slip into recession with a 0.2 percent decline — there are growing concerns that the months ahead will be as difficult as any the currency union has faced since its creation in 1999. In 2009, at the height of the global financial crisis, the eurozone's economy slumped 4.3 per cent on an annual basis.

The political turmoil in Greece has ratcheted up fears of a disorderly debt default that could lead to the country's exit from the single currency and set off a chain reaction of contagion across the eurozone economy, including Germany.

For many, including the left-wing Syriza party in Greece which stormed to a shock second in last week's general election, the answer rests on abandoning austerity — government programs that cut government spending, wages, welfare payments and jobs.

These cuts and reforms were introduced by countries including Spain and Italy when their borrowing costs on bond markets started to rise to unmanageable levels — a sign that investors are nervous about the size of their debts relative to their economic output.

Austerity is intended to address this nervousness by reducing a government's borrowing needs. However, the concern among many in Europe is that these cuts have choked off any hope of economic growth. That matters because without growth, debt burdens can get worse even at a time of huge cuts.

French President Francois Hollande heads to Berlin later Tuesday and is expected to press the case for a more growth-friendly approach to the debt crisis when he meets German Chancellor Angela Merkel. Kickstarting economic growth was a central plank of Hollande's electoral platform, not just in France but across Europe as a whole.

Growth-friendly measures include reducing red tape for small businesses, making it easier for workers to find jobs across the eurozone and breaking down barriers that countries have created to protect their own industries. Some economists go a step further and say governments should actually increase spending while economies are so weak — and make reining in deficits a longer-term goal.

Merkel, who has led Europe's response to its mushrooming crisis over the past couple of years, has preached a cocktail of austerity and economic reforms as the eurozone's only viable and long-lasting route out of the debt morass.

Greece, which is currently without a government and is now on course for another general election in June, saw its economy contract by an annual rate of 6.2 percent, slightly better than the 7.5 percent decline recorded in the previous three month period. The Greek government agreed to a harsh austerity program in order to qualify for an international bailout.

The figures are subject to change as Eurostat continues to collect figures. Several countries, including Ireland and Slovenia, have yet to release quarterly figures and for Greece there are only year-on-year comparisons.